Bank earnings tipped to fall despite margin gains

Analysts are tipping bank earnings to fall despite strong revenue momentum from widening loan margins courtesy of the central bank's interest-rate cuts.

Analysis conducted by UBS, Credit Suisse, Citigroup and Bank of America-Merrill Lynch (BoA Merrill) shows Westpac is likely to be the standout bank when the sector reports its interim results next week.

The four brokers' average estimate of Westpac's cash earnings shows a 25.2 per cent jump to around A$2.303 billion ($2.92 billion) on a tripling in margins and significantly lower costs.

National Australia Bank's (NAB) cash earnings are forecast to drop by 16 per cent to around A$2.408 billion, while ANZ Banking Group's cash earnings are expected to plunge27.6 per cent to A$1.21 billion.

Across the big four banks, including Commonwealth Bank, which reported in February, average cash earnings per share (EPS) are expected to fall by 8.4 per cent as bad debt provisions bite, UBS said on April 17.

Average first-half EPS across the four brokers puts NAB's at A111.45c, ANZ's at A57.3c and Westpac's at A86.4c.

A cut to Westpac's interim dividend by 13 per cent is also likely, BoA Merrill says. This follows ANZ and NAB recently flagging 2009 dividend cuts of 25 per cent.

Strong revenue momentum is expected to be a hallmark of the coming earnings season as banks have boosted margins by repricing their loan and deposit books by not passing on the full amount of recent interest rate cuts.

UBS says wider margins, strong volume growth in loans and deposits and surging revenue growth from their markets division proprietary trading services have added an average 10 basis points to margins for the big four over the past six months.

Westpac turbocharged its earnings courtesy of a tripling in margins to 19 basis points, while the repricing of ANZ's corporate loan book has doubled its margins to seven basis points, UBS says.

Higher bad debts and commercial property impairment costs for NAB's struggling British subsidiaries are expected to be a heavy drag on its margins. And ANZ's revenue will suffer from big losses from its exposure to US$10.9 billion ($19.35 billion) worth of credit intermediation trades with US monoline insurers.

All eyes would be on bad debt provisions and loan delinquencies as the bad debt cycle continued to dominate outlook statements because of the economic downturn, Goldman Sachs JBWere's Matthew Ross said.

He said domestic investor sentiment towards the local bank sector might be dampened by any negative surprises on bad debts emerging from the US Government's stress tests on 19 Wall St banks, due on May 4.

Bad debt charges are expected to rise to an average of 66 basis points to total loans as the bad debt cycle moves from big-name corporate failures to small-to medium-size enterprises.

But the big question is whether the banks' previously flagged upgrades to bad debt provisions will continue to offset rising bad debts.

NAB and ANZ made provisions running north of A$800 million to cover the first three to four months of 2008/09 and Westpac made first quarter provisions of $630 million, partially on exposures to Babcock and Brown, Allco Finance and ABC Learning Centres.

Loan delinquencies among consumers are expected to edge higher in line with rising unemployment, especially in New Zealand, which has been problematic for all banks and caused ANZ to flag a doubling in its full-year 2009 provision to $570 million.

- AAP